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S&P 500 Technical Chart Analysis: Powerful Wave 3 Bull Market Rally Not Over Yet

|Includes: SPDR S&P 500 Trust ETF (SPY)
Excerpt from the most recent BullBear Market Report for BullBear Traders members: SPX Chart Analysis

The very long term monthly exponential moving averages will be in full bull market alignment as soon as the 20 moves above the 50, which appears to be imminent.

 

The weekly chart has already moved into full bull market alignment with a bull cross of the 50 over the 200 a month ago.

 

Stock and Financial Market Technical Trading Analysis and Commentary

 

The daily chart shows a probable Wave 3 rally off the July 2010 bottom.

 

Stock and Financial Market Technical Trading Analysis and Commentary

 

Evidence strongly points to this move as a Wave 3 impulsive bull move and not a C wave corrective. Within that context there are a variety of scenarios describing where the index is within that Wave 3. Above is one possible scenario, which calls for a minor (iii) top soon near 1340. The wave (iv) correction would be of the same degree as the August 2010 decline, which would suggest a selloff lasting 2-4 weeks and giving back 38.2%-50% of the prior wave from the September 1, 2010 bottom.

Here's a short term chart showing the most recent wave following the November 2010 correction.

 

Stock and Financial Market Technical Trading Analysis and Commentary

 

Wave ii was essentially a zigzag (more noticeably a zigzag in other indices) and the proposed wave iv is a clear flat, so there would be alternation. But the November decline lasted a month and the late January correction took less than two weeks.

The SPX futures chart shows that the proposed wave iv tagged the lower rail of the uptrend, which gives more credence to this count:

 

Stock and Financial Market Technical Trading Analysis and Commentary

 

We can also see that three Fibonacci extension targets converge in this area, suggesting that some kind of top could occur there.

A somewhat more bullish scenario calls for a correction of a lesser degree in the 1340 area followed by a rally to a cluster of Fibonacci targets in the 1500 zone for a Wave 3 top. The penetration and weekly close above the rising blue trendline suggests this scenario may have some validity.   After consideration of all currently available data I am tending to lean towards this scenario.


Stock and Financial Market Technical Trading Analysis and Commentary

 

Another possibility is a move within the short term trend channel (black) to the 1375 area where another cluster of Fibonacci targets is situated. It's also the site of the 78.6% Fib retracement of the entire decline from the 2007 high.

 

Stock and Financial Market Technical Trading Analysis and Commentary

 

There are quite a few other plausible bullish wave counts and scenarios but these seem to be the most likely at this time. I am most concerned with identifying the wave count that calls for a wave 3 top that would be the companion to the August 2010 wave 1 top. A decline of that degree might be worth taking some profit and buying back after the decline. Any pullback of a lesser degree would not be worth the risk of losing our position. Keeping in mind that this is a Major Wave 3, we want to be very careful to not be shaken out of our position because buy points have been and will continue to be scarce throughout this wave.

The bearish count could see a C wave top at any time. Any break of the uptrend off the September bottom would put this scenario in play.

 

 

The 161.8% Fib extension of the proposed A wave comes in just a few points shy of the 2007 high, so its conceivable that Wave 2 could retrace nearly 100% of Wave 1 before failing in a Wave 3 bear market.

 

 

READ THE FULL 8 PAGE REPORT, ANALYSIS AND COMMENTARY HERE:

 

http://www.thebullbear.com/group/bullbeartradingservice/forum/topic...

 

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